- Moody’s downgrade will cut across economics, financial markets.
- Downgrade will have implications for cost of capital, could ripple through economy.
- Will have to wait and see about impact of downgrade on demand for US debt.
- The Fed will have to determine how the downgrade effects an outlook that is already in flux.
- It’s unclear if consumers today can take on the full cost of tariffs given the state of household balance sheets, recent inflation.
- We have to wait 3-6 months to see how uncertainty settles.
- Number of rate cuts this year depends on how things turn out, the details of the tariffs will matter.
- Leaning more towards only one cut this year because it will take time to understand tariffs.
- There’s a scenario where tariffs become less of a story over time.
- If the tariff transition is longer, it may impact consumer behavior.
- Treasury markets are functioning quite well.
- Inflation not moving to target as fast as anticipated.
- Uncertainty means there is higher risk, the Fed only controls one part of the price of capital.
- As things get more expensive, it changes the choices policymakers, households and businesses face, that will influence the path of the economy.
- Have not seen much movement on the jobs side, firms say they don’t have plans for large layoffs.
- Inflation expectations are moving in a troubling way.
- I worry a lot about the inflation side of out mandate.
- Right now see more risk of higher inflation than the employment side of the mandate.
- Decline in sentiment is not yet playing out in the marketplace.
- May be at a point where the distance between sentiment and data starts to narrow; inventory rundown may be nearing an end.
- The market volatility in April did not feel that close to a significant financial event.
- Volatility reflected people adjusting to new expectations, information about tariffs.
- Even the reduced tariffs on China are economically significant.
Bostic is a hawk and he’s not a voting member in 2025. He’s been supporting just one rate cut this year as he’s placing more weight on the inflation side of the mandate given that inflation hasn’t moved to target as fast as anticipated. He’s also worrying about inflation expectations.
This article was written by Giuseppe Dellamotta at www.forexlive.com.